Weekend reading links

1. Bloomberg points to the widespread massaging of corporate account books in calculating EBITDA by some of the riskiest borrowers so as to take out bigger loans. As the graphic shows, the gap between the real EBITDA and the massaged one used to take out loans has been widening in recent years.

Sample this,

Take Del Frisco’s Restaurant Group Inc., the New York steakhouse chain. The company sought a $390 million loan last year to finance its acquisition of Spanish tapas chain Barteca Restaurant Group. It took Del Frisco 2,723 words to explain what Ebitda means, the most of any borrower included in the study. Its definition included 22 types of adjustments it could use to boost its reported earnings.

Theoretically, the measure is thought to provide a reasonably good measure of the company cash generating ability and how much money the company could have available to service its debt, since it excludes the management decisions on indebtedness and investments.

2. The most stunning exhibit from WeWork's growing pile of misdemeanours and fraud is this graphic about the divergence between its quarterly net income estimates and actual realisations.

Given the consistent and stark divergence, begs the question why were the big name investors and Board members so tolerant of what were clearly lies being peddled about the company's profitability?

3. Amidst all the hype, a real good use area of Blockchain is trade-finance. To get a sense of the challenge associated with trade finance,

On average, a cross-border transaction requires the exchange of 36 documents and 240 copies, says Kerstin Braun, president of Stenn Group, which provides trade finance... A letter of credit — a promise to pay for the goods if certain conditions are met — is sent to the exporter by the importer’s bank. This gives the exporter the green light to ship the goods. The exporter then presents proof of shipping to get financing from its own bank, which recoups the money directly from the importer’s bank. At the moment, information is limited: the companies doing business are often in different parts of the world and may have little credit history. Information is also slow to reach the relevant parties as paper documents have to be physically exchanged.

Blockchain can bridge this information asymmetry by providing access to information in real time, with ability to track the entire history of transactions. And it opens up very interesting possibilities,

The riskiness of trade finance, in theory, reduces as the goods get closer to the importer, although this is currently hard for all parties to ascertain. Aided by satellite or radio-frequency identification technology, blockchain could allow interested parties — from exporters to banks — to see immediately when, for instance, the goods are put on to a ship or the logistics firm picks them up. Professor Hau Lee of the Stanford Graduate School of Business foresees a process of “dynamic factoring”, where at each stage of the journey, as risk falls, so too does the rate of interest charged to the exporter or importer. 

4. Interesting graphic from OECD's India Economic Survey 2019 about the housing affordability issue in India - housing prices have grown faster than GDP growth rate in recent years.

5. Business concentration in the US,

Between 1987 and 2016 the share of employment accounted for by firms with over 5,000 employees rose from 28% to 34%. Between 1997 and 2012, this newspaper reported in 2016, the average share of revenues accounted for by the top four firms in each of 900 economic sectors grew from 26% to 32%.

6. An editorial in ET rightly urges caution on the portfolio inflows, 

India figures among countries with the 10 largest forex reserves. Of these, only Brazil, apart from India, runs a current account deficit. All the rest are export powerhouses that run current account surplus and accumulate claims on other economies. India’s foreign exchange reserves are capital inflows unabsorbed into the real economy, and represent liabilities. Of these capital inflows, foreign direct investment is the most desirable kind and should continue to be welcomed. External commercial borrowings take advantage of low interest rates abroad and are welcome, within prudent limits. It is portfolio flows that can be discouraged in a calibrated fashion. Foreign portfolio inflows are welcome additions to domestic financial savings, true. But these, in excess, also push up stock prices at a time when the underlying financials are a mess, setting up the market for a fall — all the harder when the excess liquidity produced by quantitative easing in the US, Europe and Japan is sucked back in. This is the right time to clamp down on some inflows of doubtful provenance.

In fact, given the prominent role of private equity in FDI - with their services and real estate destinations, short-term horizons and greenfield nature of investments - even its desirable value needs to be qualified.

7. Ofwat, UK's water regulator, has issued its five-year determination of terms of service of the country's water utilities. The determination mandates investments to improve quality, limits return on capital allowed, restricts investor payouts, and demands reduction in debt levels,

The regulator is also demanding that the 10 large regional water and sewage companies and seven smaller water suppliers lower debt levels. Ofwat has also set the companies a target to reduce water leaks by 16 per cent between 2020 and 2025... The ruling is part of Ofwat’s long-awaited final determination on how much water companies can charge customers and how much they must spend on infrastructure, such as mains pipes, and sewage treatment over the next five years... The regional monopolies in England and Wales were privatised almost free of debt 30 years ago in a model that has not been repeated elsewhere in the world. Since then the sector has racked up a combined £51bn in debt and paid out £56bn in dividends, while at the same time failing to hit its targets for cutting leaks and incurring a series of fines for polluting rivers. Under the ruling, Ofwat will allow the utilities to invest £51bn over the next five years to meet the leakage and pollution targets by modernising the country’s increasingly stressed infrastructure. The allowed return on capital for the water companies has been set at 2.96 per cent, the lowest return since the privatisation of the water sector, down from 3.19 per cent, while the cost of equity has been reduced from 4.5 per cent to 4.2 per cent.

8. Very good reporting by Sayantan Bera in Livemint about the plight of landless poor in rural India.

9.  The World Bank highlights a "towering" $55 trillion debt accumulated by developing countries by end of 2018. Since 2010, the total debt has risen by 54 percentage points to touch 170 per cent of emerging market GDP.

10. Fascinating article about the rapid emergence of the smart phone as the ultimate personal device. Over this decade, the smart phone has come to render obsolete the camera, satellite navigation system, camcorder, music devices like iPods, and messaging devices like Blackberry.